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China Debts Dwarf Official Data Prompting Alarms: Methodology

A Scale Model of the Yujiapu Financial District
A scale model shows the Manhattan-inspired Yujiapu financial district, center, in Tianjin. Photographer: Sim Chi Yin/Bloomberg

To find out about the debt of China’s local government financing vehicles, Bloomberg News examined disclosures made by them in publicly available Chinese-language prospectuses for bonds, notes and commercial paper.

The survey focused on 2011 issuances in an effort to provide the most up-to-date snapshot. In all, there were 231 such issuers through Dec. 10, which raised a combined 354.1 billion yuan ($55.8 billion).

The documents offer a rare window into these companies’ borrowing and obligations because they all provide information on “total liabilities” (负债合计). This is made up mostly of bank borrowing and bond debt, though it also includes items such as accounts payable and taxes due.

The tally of the issuers’ combined total liabilities comes to 3.96 trillion yuan of debt. That’s more than three-quarters of the 4.97 trillion yuan that the National Audit Office has said was owed by 6,576 such borrowers at the end of last year.

Bloomberg News surveyed all of the companies that are majority owned by local or provincial governments. They include infrastructure companies; local state asset management companies; expressway, ports, airports, and water companies; and provincial-level railroad and energy companies.

Infrastructure Companies

When asked to define what it included, the audit office said it counted debt that local governments have responsibility to repay, that they have guaranteed, or other debts that they may be liable for. It didn’t give more specific detail in an e-mailed response to questions.

A key focus of the audit office’s June report was the debt the government had responsibility to repay. At that time the audit office estimated total local borrowing, including that by local government financing vehicles, at 10.7 trillion yuan.

The audit office counted debt as of the end of 2010. By contrast, the prospectuses vary widely in terms of when they took their measure of total liabilities. Some issuers reported total debt as of the end of 2009, while others did so for as recently as Sept. 30, 2011. In each case, Bloomberg News took the most recent data available.

Most of the 231 companies examined had subsidiaries. Some of those subsidiaries may have also been considered as separate financing vehicles by the National Audit Office.

Opaque Borrowers

Bloomberg found two instances -- one in Tianjin and one in Guangdong province -- of companies listing as subsidiaries entities that had sold bonds, notes or commercial paper this year. The subsidiaries’ debt and lines of credit data were not included in the tally to avoid double-counting.

Bloomberg’s survey covers many larger local government financing companies, because they are generally the issuers of bonds. However, the survey also excludes some of the larger ones because they didn’t issue prospectuses this year. They include Sichuan Development Holding Co. and Jiangsu Communications Holding Co., each of which has previously reported debt of more than 115 billion yuan when selling bonds.

Bloomberg also tallied borrowing on a bank-by-bank basis for the 113 companies that provided that information. Such disclosures are only made in prospectuses for medium-term notes and commercial paper. The documents detail lines of credit (授信) from banks and trust companies, specifying total lines of credit given, the amount used, and the amount remaining.

A tally was also made of unused lines of credit the bank had extended to them to show future potential borrowing.

Possible Repayments

It’s possible that some portion of the utilized lines of credit may have already been paid off. Only one company among the 113, Inner Mongolia Highway Investment Co., provided details in tabular form showing repayment of loans. The company reported that as of March 31 it had paid off 371 million yuan of a total 10.4 billion yuan in bank borrowing, or 3.6 percent.

The criteria Bloomberg used are similar to that of China Construction Bank Corp. The firm said it included construction and infrastructure companies, expressway companies, ports, railways and airports in the 580 billion yuan of loans to local government finance vehicles the Beijing-based lender reported as of June 30. Some of its loans to these entities are also extended to subsidized-home construction companies, it added.

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